Restructuring Terminology: A Complete Glossary for Professionals

This glossary provides a foundational understanding of key terminology used in restructuring and bankruptcy proceedings, essential for practitioners and those entering the field.

A

Under the Bankruptcy Code, a debtor must provide protections to secured creditors to prevent diminution in the value of their collateral during the case. This ensures the creditor's interest is not harmed while the debtor uses the property.

A cost incurred by the bankruptcy estate after the petition date, typically for preserving the estate or administering the case. These claims receive the highest priority for payment, ahead of most pre-petition debts.

An injunction that automatically goes into effect upon the filing of a bankruptcy petition, prohibiting creditors from taking collection actions against the debtor or its property. It provides the debtor with immediate relief and breathing room.

Legal powers granted to a debtor in possession or trustee to recover certain pre-petition transfers of property for the benefit of the bankruptcy estate. These actions aim to ensure equitable distribution among creditors.

B

A formal document used by creditors and equity holders to vote on a proposed Plan of Reorganization. The ballot specifies the class to which the voter belongs and allows them to accept or reject the plan.

Title 11 of the United States Code, which is the federal statute governing bankruptcy law in the United States. It outlines the procedures and substantive law for various types of bankruptcy cases.

Comprises all legal and equitable interests of the debtor in property as of the commencement of the bankruptcy case. This includes tangible and intangible assets, wherever located.

The deadline set by the bankruptcy court for creditors to file their Proofs of Claim. Claims filed after the bar date may be disallowed unless the creditor shows excusable neglect.

C

A chapter of the Bankruptcy Code governing liquidation bankruptcies. A trustee is appointed to gather and sell the debtor's non-exempt assets, distributing the proceeds to creditors according to priority.

A chapter of the Bankruptcy Code governing reorganization bankruptcies, primarily for businesses but also available to individuals. It allows the debtor to continue operating while developing a plan to repay creditors over time.

A right to payment from the debtor, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.

The court's approval of a Plan of Reorganization, making it legally binding on the debtor, creditors, and other parties in interest. Confirmation is the culmination of the Chapter 11 process.

An entity that has a claim against the debtor that arose at or before the order for relief. Creditors are categorized by the nature and priority of their claims.

A committee, typically composed of the largest unsecured creditors, appointed by the U.S. Trustee in a Chapter 11 case. Its role is to investigate the debtor's financial affairs and negotiate a plan of reorganization on behalf of unsecured creditors.

A vendor whose continued goods or services are deemed essential to the debtor's ongoing operations and reorganization efforts. The debtor may seek court approval to pay pre-petition claims of critical vendors to ensure their continued support.

The ability of a bankruptcy court to confirm a Plan of Reorganization over the objection of an impaired class of creditors or equity holders. To "cram down" a plan, it must not discriminate unfairly and must be fair and equitable.

D

The individual or entity that has filed a petition for relief under the Bankruptcy Code. The debtor initiates the bankruptcy process to reorganize its finances or liquidate its assets.

In a Chapter 11 case, the debtor itself continues to operate its business and manage its assets, effectively acting with most of the powers of a trustee. This contrasts with Chapter 7, where a trustee is always appointed.

A document approved by the bankruptcy court that provides adequate information about a Plan of Reorganization to allow creditors and equity holders to make an informed decision about whether to vote for or against the plan.

The legal release of a debtor from personal liability for certain pre-petition debts. A discharge permanently enjoins creditors from taking action to collect those debts.

Debtor in Possession financing, which is new funding provided to a debtor during a Chapter 11 case. This financing typically receives superpriority status, making it attractive to lenders.

E

The specific date upon which a confirmed Plan of Reorganization becomes operative and legally binding. On this date, distributions to creditors typically commence, and the debtor's obligations are restructured as per the plan.

A doctrine allowing a bankruptcy court to reorder the priority of claims, subordinating a claim that would otherwise have a higher priority to a lower priority. This typically occurs when a creditor has engaged in inequitable conduct that harmed other creditors.

The period during which only the debtor has the right to file a Plan of Reorganization and a Disclosure Statement. This provides the debtor with control over the plan process.

A contract under which both the debtor and the other party still have material obligations to perform. The debtor can choose to assume, assume and assign, or reject such contracts.

F

A series of urgent motions filed by a debtor immediately upon filing for Chapter 11 bankruptcy. These motions seek court approval for actions necessary to maintain the debtor's operations and ensure a smooth transition into bankruptcy.

A transfer of property or an obligation incurred by the debtor before bankruptcy that can be set aside by the debtor in possession or trustee. This includes transfers made with actual intent to hinder, delay, or defraud creditors, or constructive fraud where the debtor received less than reasonably equivalent value while insolvent.

G

A business that is operating and expected to continue operating for the foreseeable future, without the threat of liquidation. The valuation of a business as a going concern is typically higher than its liquidation value.

I

A class of claims or interests whose legal, equitable, or contractual rights are altered by a Plan of Reorganization. If a class is unimpaired, it is deemed to accept the plan and does not vote.

A financial state where a debtor's liabilities exceed its assets (balance sheet insolvency) or the debtor is unable to pay its debts as they become due (cash flow insolvency). Insolvency is a prerequisite for bankruptcy.

A temporary order issued by the bankruptcy court, often on an expedited basis, to address immediate needs or issues. It remains in effect until a final hearing can be held.

L

A legal claim or charge against property, granted to a creditor as security for a debt. If the debt is not paid, the creditor can enforce the lien to satisfy the obligation from the property.

A process, typically in individual Chapter 13 cases but also relevant in Chapter 11, where a junior lien (e.g., a second mortgage) on an asset is reclassified as an unsecured claim if the value of the collateral is less than the amount of the senior lien.

The process of converting a debtor's assets into cash, typically through sale, to distribute the proceeds to creditors. This is the primary objective of a Chapter 7 bankruptcy.

N

Formal communication required by the Bankruptcy Code and rules to inform parties in interest of significant events, hearings, or deadlines in a bankruptcy case. Proper notice is essential for due process.

O

Transactions or activities that are typical, regular, or customary for the debtor's business operations. Transfers made in the ordinary course of business are often protected from avoidance actions.

P

The central document in a Chapter 11 bankruptcy, outlining how the debtor intends to restructure its debts and continue operating. It details the treatment of all claims and interests.

A transfer of property made by the debtor to a creditor within a specified period (typically 90 days for non-insiders, one year for insiders) before the bankruptcy filing, which allows the creditor to receive more than it would have in a Chapter 7 liquidation. Such transfers may be avoided.

Certain categories of unsecured claims that are given a higher ranking for payment under the Bankruptcy Code, ahead of general unsecured claims. These include administrative expenses, certain tax claims, and wages.

A formal written statement filed by a creditor with the bankruptcy court, asserting its right to payment from the debtor's estate. It must specify the amount and basis of the claim.

R

The debtor's decision to cease performance under an executory contract or unexpired lease. Rejection is treated as a breach of contract occurring immediately before the bankruptcy filing, giving the non-debtor party an unsecured claim for damages.

A provision in a Plan of Reorganization that discharges certain parties (often directors, officers, or other stakeholders) from claims that arose prior to the effective date of the plan. Releases are often heavily negotiated.

S

Comprehensive financial documents filed by the debtor at the commencement of a bankruptcy case. Schedules list all assets and liabilities, while statements provide information about the debtor's financial affairs.

A sale of a debtor's assets outside the ordinary course of business, authorized by Section 363 of the Bankruptcy Code. These sales are often conducted free and clear of liens, claims, and encumbrances.

The right of a creditor to reduce the amount owed to the debtor by the amount the debtor owes to that creditor, where both debts arose pre-petition and are mutual.

The financial condition where a debtor's assets exceed its liabilities, and it is able to pay its debts as they become due. The opposite of insolvency.

An initial bidder in a Section 363 asset sale or other auction process, whose bid sets a floor for subsequent bids. The stalking horse often receives certain protections, such as a break-up fee or expense reimbursement.

The act of lowering the priority of a debt or claim, either contractually (e.g., through a subordination agreement) or equitably by court order.

A claim that is granted a priority higher than all other administrative expenses, including those typically at the top of the priority waterfall.

T

An individual or corporation appointed to administer a bankruptcy estate. In Chapter 7, a trustee is always appointed. In Chapter 11, a trustee may be appointed "for cause," such as fraud or gross mismanagement, if the DIP fails.

U

A creditor whose claim is not backed by any collateral or lien on the debtor's property. General unsecured claims are typically paid only after secured and priority claims are satisfied.

V

The specific geographic location where a bankruptcy case must be filed. Proper venue is typically where the debtor's domicile, residence, principal place of business, or principal assets are located for the longest portion of the 180 days preceding the filing.

The process by which creditors and equity holders accept or reject a proposed Plan of Reorganization. Each impaired class votes, and acceptance generally requires approval by a majority in number and two-thirds in amount of claims.

Z

The period preceding formal insolvency where a company approaches financial distress, characterized by declining financial health and increasing risk of default. In this zone, directors may owe fiduciary duties to creditors in addition to shareholders.